Basics of accounting for foreign currency transactions

3. Accounts payable denominated in foreign currencies

Accounting for a goods purchase denominated in a foreign currency is similar to accounting for a sale described above. Letís continue our example by describing how the parts manufacturer would account for a purchase of steel from Canada. On December 1, 201X, the manufacturer orders $100,000 (U.S. dollars) of metal when one Canadian dollar (CAD) is worth $0.95. The price of the order in CAD is therefore 105,263 (i.e., $100,000 ų 0.95, rounded). The manufacturer pays for the order on December 20, when one Canadian dollar is worth $0.98.† Recall that the manufacturer records all transactions on its books in U.S. dollars.

Account Names

Debits

Credits

December 1

   

Raw Materials Inventory

100,000

 

†††† Accounts Payable

 

100,000

     

December 20

   

Accounts Payable

100,000

 

Loss on Foreign Currency Transaction

3,158

 

†††† Cash

 

103,158*

(*) $103,158 = CAD 105,263 x $0.98, rounded

If instead the Canadian dollar is worth $0.93 on December 20, the company would have to pay less than $100,000 (U.S. dollars) to satisfy the liability, resulting in a gain.

Just as before, letís extend the example by assuming that the Canadian supplier does not require payment until January 31, when a Canadian dollar is worth $0.99. The rate is still $0.98 on December 31.

Account Names

Debits

Credits

December 31

   

Loss on Foreign Currency Transaction

3,158

 

†††† Accounts Payable

 

3,158*

     

January 31

   

Accounts Payable

103,158**

 

Loss on Foreign Currency Transaction

1,052

 

†††† Cash

 

104,210***

(*) $3,158 = CAD 105,263 x $0.03, rounded, where $0.03 = $0.98 - $0.95

(**) $103,158 = CAD 105,263 x $0.98, rounded, or $100,000 + $3,158

(***) $104,210 = CAD 105,263 x $0.99, rounded

Youíll notice that, for both receivable and payable situations, we used the gain/loss account to balance the difference between the receivable or payable carrying amount and the cash (in U.S. dollars) actually received or paid.

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